HEALTH DISCOVERY CORP - Quarter Report: 2007 September (Form 10-Q)
UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10-QSB
x Quarterly
report under Section 13 or 15(d) of the Securities Exchange Act of
1934
For
the quarterly period ended September 30, 2007
o
Transition report under
Section 13 or 15(d) of the Exchange Act
For
the
transaction period from _________ to _________
Commission
file number 333-62216
HEALTH
DISCOVERY CORPORATION
|
|
Georgia
|
74-3002154
|
|
(State
or other jurisdiction of incorporation or
organization)
|
(IRS
Employer Identification No.)
|
2
East Bryan Street, Suite #601
Savannah,
Georgia 31401
|
|
(Address
of principal executive offices)
|
|
912-443-1987
|
|
(Issuer's
telephone number, including area code)
|
|
(Former
name, former address and former fiscal year,
if
changed since the last report)
|
Check
whether the issuer (1) filed all reports required to be filed by Section
13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter
period
that the registrant was required to file such reports), and (2) has been
subject
to the filing requirements for at least the past 90 days. Yes [X] No
[ ]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
[ ] No [X]
APPLICABLE
ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS
DURING THE PRECEDING FIVE YEARS
Check
whether the registrant filed all documents and reports required to be filed
by
Section l2, 13 or 15(d) of the Exchange Act after the distribution of securities
under a plan confirmed by a court. Yes [ ] No
[ ]
APPLICABLE
ONLY TO CORPORATE ISSUERS
State
the
number of shares outstanding of each of the issuer's classes of common equity,
as of the latest practicable date: 169,007,206 shares
of common stock, no par value,
were issued and outstanding
as of November
12, 2007.
Transitional
Small Business Disclosure Format (Check one): Yes [ ] No [X]
TABLE
OF CONTENTS
PART
I
|
FINANCIAL
INFORMATION
|
Page
|
Item
1.
|
Financial
Statements
|
|
1
|
||
2
|
||
3
|
||
4
|
||
Item
2.
|
10
|
|
Item
3.
|
17
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|
PART
II
|
OTHER
INFORMATION
|
17
|
Item
1.
|
17
|
|
Item
2.
|
18
|
|
Item
5.
|
18
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|
Item
6.
|
19
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|
21
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ii
HEALTH
DISCOVERY CORPORATION
(unaudited)
Assets
|
September
30,
|
||||
2007
|
||||
Current
Assets
|
||||
Cash
|
$ |
2,082,199
|
||
Accounts
Receivable
|
187,500
|
|||
Prepaid
Expenses and Other Assets
|
92,626
|
|||
Total
Current Assets
|
2,362,325
|
|||
Equipment,
Less Accumulated Depreciation of $20,773
|
9,225
|
|||
Other
Assets
|
||||
Accounts
Receivable – Long Term
|
112,500
|
|||
Patents,
Less Accumulated Amortization of $877,294
|
3,108,500
|
|||
Investments
|
5,000
|
|||
Total
Assets
|
$ |
5,597,550
|
||
Liabilities
and Stockholders’ Equity
|
||||
Current
Liabilities
|
||||
Accounts
Payable – Trade
|
$ |
158,797
|
||
Accrued
Liabilities
|
246,006
|
|||
Deferred
Revenue
|
98,819
|
|||
Total
Current Liabilities
|
503,622
|
|||
Deferred
Revenue – Long Term
|
433,281
|
|||
Accrued
Interest Payable
|
6,028
|
|||
Convertible
Note Payable
|
49,351
|
|||
Total
Liabilities
|
992,282
|
|||
Commitments
|
||||
Stockholders’
Equity
|
||||
Series
A Preferred Stock, Convertible, Stated Value of $0.08 per
Share,
|
||||
7,437,184
Shares
Authorized, Issued and Outstanding
|
594,975
|
|||
Common
Stock, No Par Value, 300,000,000 Shares Authorized
|
||||
169,007,206
Shares Issued
and Outstanding
|
15,300,625
|
|||
Accumulated
Deficit
|
(11,290,332 | ) | ||
Total
Stockholders’ Equity
|
4,605,268
|
|||
Total
Liabilities and Stockholders' Equity
|
$ |
5,597,550
|
See
accompanying notes to financial statements.
1
HEALTH
DISCOVERY CORPORATION
(unaudited)
Three
Months
|
Three
Months
|
Nine
Months
|
Nine
Months
|
||||||||||||||
Ended
|
Ended
|
Ended
|
Ended
|
||||||||||||||
September 30,
|
September
30,
|
September
30,
|
September
30,
|
||||||||||||||
2007
|
2006
|
2007
|
2006
|
||||||||||||||
Revenues:
|
|||||||||||||||||
Licensing
|
$ |
17,343
|
$ |
20,833
|
$ |
39,010
|
$ |
195,833
|
|||||||||
Cost
of Revenues:
|
|||||||||||||||||
Internal
Development
|
7,500
|
9,480
|
18,900
|
19,134
|
|||||||||||||
Gross
Profit
|
9,843
|
11,353
|
20,110
|
176,699
|
|||||||||||||
Operating
Expenses:
|
|||||||||||||||||
Amortization
|
65,680
|
65,680
|
197,040
|
197,039
|
|||||||||||||
Professional
and Consulting Fees
|
304,352
|
178,681
|
796,661
|
925,946
|
|||||||||||||
Compensation
|
218,396
|
51,587
|
540,106
|
611,609
|
|||||||||||||
Other
General and Administrative Expenses
|
128,729
|
111,859
|
362,464
|
447,274
|
|||||||||||||
Total
Operating Expenses
|
717,157
|
407,807
|
1,896,271
|
2,181,868
|
|||||||||||||
Loss
From Operations
|
(707,314 | ) | (396,454 | ) | (1,876,161 | ) | (2,005,169 | ) | |||||||||
Other
Income (Expense)
|
|||||||||||||||||
Interest
Income
|
4,926
|
3,946
|
14,902
|
11,945
|
|||||||||||||
Litigation
Settlement
|
(42,000 | ) |
-
|
(42,000 | ) |
-
|
|||||||||||
Gains
on Restructuring of Accounts Payable
|
-
|
20,318
|
44,594
|
97,864
|
|||||||||||||
Interest
Expense
|
(81,395 | ) | (79,698 | ) | (285,509 | ) | (120,550 | ) | |||||||||
Total
Other Income (Expense)
|
(118,469 | ) | (55,434 | ) | (268,013 | ) | (10,741 | ) | |||||||||
Net
Loss
|
$ | (825,783 | ) | $ | (451,888 | ) | $ | (2,144,174 | ) | $ | (2,015,910 | ) | |||||
Weighted
Average Outstanding Shares
|
129,865,585
|
116,220,884
|
121,832,264
|
115,746,384
|
|||||||||||||
Loss
Per Share
|
$ | (.01 | ) | $ | (.00 | ) | $ | (.02 | ) | $ | (.02 | ) | |||||
See
accompanying notes to financial statements.
2
HEALTH
DISCOVERY CORPORATION
(unaudited)
For
the
Nine Months Ended September 30, 2007 and 2006
Nine
Months
|
Nine
Month
|
|||||||
Ended
|
Ended
|
|||||||
September
30, 2007
|
September
30, 2006
|
|||||||
Cash
Flows From Operating Activities
|
||||||||
Net
Loss
|
$ | (2,144,174 | ) | $ | (2,015,910 | ) | ||
Adjustments
to Reconcile Net Loss to Net Cash
|
||||||||
Used
by Operating Activities:
|
||||||||
Stock
Issued in Settlement of Litigation
|
32,000
|
-
|
||||||
Stock-based
Compensation
|
158,187
|
250,037
|
||||||
Services
Exchanged for Warrants
|
226,669
|
380,548
|
||||||
Services
Exchanged for Common Stock
|
-
|
61,917
|
||||||
Interest
Expense Exchanged for Warrants
|
-
|
55,400
|
||||||
Issuance
of Warrants
|
33,756
|
-
|
||||||
Accretion
of Debt Discount
|
192,361
|
-
|
||||||
Gains
on Restructuring of Accounts Payable
|
(44,594 | ) | (97,864 | ) | ||||
Depreciation
and Amortization
|
203,556
|
202,308
|
||||||
Refund
of Deposit
|
25,759
|
-
|
||||||
Increase
in Accounts Receivable
|
(280,000 | ) | (20,000 | ) | ||||
Increase
in Deferred Revenue
|
430,989
|
9,167
|
||||||
Increase
in Prepaid Expenses and Other Assets
|
(8,198 | ) | (31,058 | ) | ||||
Decrease
in Accounts Payable – Trade
|
(34,538 | ) | (83,336 | ) | ||||
Increase
in Accrued Liabilities
|
185,518
|
288,036
|
||||||
Net
Cash Used by Operating Activities
|
(1,022,709 | ) | (1,000,755 | ) | ||||
Cash
Flows From Investing Activities:
|
||||||||
Purchase
of Equipment
|
(998 | ) | (502 | ) | ||||
Investment
in Joint Venture
|
(5,000 | ) |
-
|
|||||
Net
Cash Used by Investing Activities
|
(5,998 | ) | (502 | ) | ||||
Cash
Flows From Financing Activities:
|
||||||||
Repayment
of Notes Payable
|
-
|
(26,780 | ) | |||||
Proceeds
from Sales of Common Stock, Net of Fees
|
2,436,540
|
126,400
|
||||||
Proceeds
from Borrowing
|
-
|
1,000,000
|
||||||
Net
Cash Provided by Financing Activities
|
2,436,540
|
1,099,620
|
||||||
Net
Increase in Cash
|
1,407,833
|
98,363
|
||||||
Cash,
at Beginning of Period
|
674,366
|
719,167
|
||||||
Cash,
at End of Period
|
$ |
2,082,199
|
$ |
817,530
|
||||
Stock-Based
Investing and Financing Transactions:
|
||||||||
Common
Stock, Series A Preferred Stock, and Warrants Issued in
|
||||||||
Settlement
Of Promissory Notes
|
$ |
1,893,774
|
$ |
-
|
||||
Warrants
Issued in Restructuring of Accounts Payable
|
$ |
-
|
$ |
55,454
|
||||
Supplemental
disclosures of cash flow information:
|
||||||||
Cash
Paid for Interest
|
$ |
3,167
|
$ |
2,764
|
See
accompanying notes to financial
statements.
3
HEALTH
DISCOVERY CORPORATION
Note
A - BASIS OF
PRESENTATION
Health
Discovery Corporation (the “Company”) is a biotechnology-oriented company that
has acquired certain patents and has patent pending applications for certain
machine learning tools used for diagnostic and drug discovery. The
Company licenses the use of its patent protected technology and utilizes
such
technology internally to develop diagnostic tests, drug monitoring tests
and
drug targets for therapeutic use, and sells or licenses such discoveries
to
diagnostic or pharmaceutical companies worldwide.
The
accounting principles followed by
the Company and the methods of applying these principles conform with accounting
principles generally accepted in the United States of America
(GAAP). In preparing financial statements in conformity with GAAP,
management is required to make estimates and assumptions that affect the
reported amounts in the financial statements. Actual results could
differ significantly from those estimates.
The
interim financial statements
included in this report are unaudited but reflect all adjustments which,
in the
opinion of management, are necessary for a fair presentation of the financial
position and results of operations for the interim periods
presented. All such adjustments are of a normal recurring
nature. The results of operations for the period ended September 30,
2007 are not necessarily indicative of the results of a full year’s operations
and should be read in conjunction with the financial statements and footnotes
included in the Company’s annual report on Form 10-KSB for the year ended
December 31, 2006.
Recent
Accounting
Pronouncements
In
June 2006, the Financial Accounting
Standards Board (“FASB”) issued FASB Interpretation No. 48, Accounting for
Uncertainty in Income
Taxes – An Interpretation of FASB Statement No. 109, (“FIN 48”). FIN 48
clarifies the accounting for uncertainty in income taxes by prescribing a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken
in a
tax return. This pronouncement is effective for fiscal years
beginning after December
15, 2006. We
adopted FIN 48 effective January 1, 2007. This
adoption has not had a
material impact on our financial statements.
In
September 2006, the FASB issued
Statement No. 157, Fair
Value Measurements,
(“Statement No. 157”). This statement provides a single definition of
fair value, a framework for measuring fair value, and expanded disclosures
concerning fair value. Previously, different definitions of fair
value were contained in various accounting pronouncements creating
inconsistencies in measurement and disclosures. This pronouncement is
effective for fiscal years beginning after November 15, 2007. We
do not expect the
adoption of Statement No. 157 to have a material impact on our financial
position, results of operations, or cash flows.
Note
B – REVENUE RECOGNITION
Revenue
is generated through the sale or license of patented technology and processes
and from services provided through development agreements. These
arrangements are controlled by contracts that dictate responsibilities and
payment terms. The Company recognizes revenues as they are earned
over the duration of a license agreement or upon the sale of any owned patent
once all contractual obligations have been fulfilled. Revenue is
earned under development agreements in the period the services are
performed.
Effective
July 1, 2007, the Company entered into a patent license and settlement agreement
with Ciphergen Biosystems, Inc. (“Ciphergen”) in connection with the pending
litigation styled Health Discovery Corporation v. Ciphergen Biosystems,
Inc. Case No. 07-00285-CRB before the United States District Court for the
Northern District of California. The agreement provides Ciphergen a
license to use certain patents. In consideration for entering into
the Agreement, Ciphergen agreed to pay the Company $600,000 over a two-year
period. The revenue associated with this settlement was recorded net
of $130,000 in contingently payable attorney fees as deferred revenue in
the
amount of $470,000 and will be recognized over the sixteen year remaining
life
of the subject patents. Deferred revenue represents the unearned
portion of payments received in advance for licensing agreements. The
Company had total unearned revenue of $532,100 as of September 30,
2007. Unearned revenue of $98,819 is recorded as current and $433,281
is classified as long-term.
4
HEALTH
DISCOVERY CORPORATION
Notes
to Financial Statements, continued
Note
C - NET LOSS PER SHARE
Basic
Earnings Per Share (“EPS”) includes no dilution and is computed by dividing
income or loss available to common shareholders by the weighted average number
of common shares outstanding for the period. Diluted EPS reflects the
potential dilution of securities that could share in the earnings or losses
of
the entity. Due to the net loss in all periods presented, the
calculation of diluted per share amounts would create an anti-dilutive result
and therefore is not presented.
Note
D - STOCK-BASED EXPENSE
Stock-based
expense included in our net loss for the three months and nine months ended
September 30, 2007 consisted of $180,858 and $450,612
respectively in
compensatory warrants and options for professional consulting services,
compensation, and settlement of litigation. Stock-based expense
included in our net loss for the three months and nine months ended September
30, 2006 consisted of $186,884 and $772,775 respectively.
As
of September 30, 2007,
there was approximately $528,558 of
unrecognized cost related to stock option and warrant grants. The
cost is to be recognized over the remaining vesting periods that average
approximately 4 years. No options have been granted in
2007.
The
Company granted 2,000,000 options
during the second quarter of 2006. The fair value of each option
granted in 2006 was $0.11 and was estimated on the date of grant using the
Black-Scholes pricing model with the following assumptions: dividend yield
at
0%, risk-free interest rate of 5.00%, an expected life of 10 years, and
volatility of 133%. Expected option lives and volatilities used in
the fair valuation calculations are based on historical data of the Company
and
the related expense is recognized on a straight-line basis over the vesting
period.
The
following schedule summarizes stock option activity for the nine months ended
September 30, 2007 and the twelve months ended December 31, 2006:
Option
Shares
|
Weighted
Average
Exercise
Price
|
|||||
Outstanding,
January 1, 2006
|
2,500,000
|
$ |
0.08
|
|||
Granted
|
2,000,000
|
0.11
|
||||
Exercised
|
(600,000 | ) |
0.01
|
|||
Forfeited
|
(400,000 | ) |
0.10
|
|||
Outstanding,
December 31, 2006
|
3,500,000
|
$ |
0.11
|
|||
Granted
|
-
|
-
|
||||
Exercised
|
-
|
-
|
||||
Forfeited
|
-
|
-
|
||||
Outstanding,
September 30, 2007
|
3,500,000
|
$ |
0.11
|
The
weighted average remaining life of the outstanding options at September 30,
2007
is 8.25 years.
There
were 2,625,000 options exercisable at September 30, 2007. The
exercisable options have a weighted average exercise price of $0.11 and a
weighted average remaining life of 8.25 years.
5
HEALTH
DISCOVERY CORPORATION
Notes
to Financial Statements, continued
Note
D - STOCK-BASED EXPENSE, continued
Information
about warrants outstanding at September 30, 2007 is summarized
below:
Exercise
Prices
|
Number
Outstanding
|
Weighted-
Average
Remaining
Contractual
Life (years)
|
Number
Exercisable
|
Weighted
Average
Remaining
Contractual
Life
(years)
of
Exercisable
Warrants
|
||||
$0.01
|
600,000
|
1
|
600,000
|
1
|
||||
$0.08
|
3,300,000
|
3
|
300,000
|
3
|
||||
$0.10
|
1,425,750
|
2
|
1,325,750
|
2
|
||||
$0.11
|
1,500,000
|
2
|
1,500,000
|
2
|
||||
$0.12
|
150,000
|
2
|
150,000
|
2
|
||||
$0.13
|
5,500,000
|
3
|
3,667,000
|
2
|
||||
$0.14
|
52,138,822
|
3
|
52,138,822
|
3
|
||||
$0.15
|
1,000,000
|
2
|
1,000,000
|
2
|
||||
$0.16
|
10,000,000
|
2
|
10,000,000
|
2
|
||||
$0.19
|
51,538,822
|
3
|
51,538,822
|
3
|
||||
$0.20
|
500,000
|
1
|
500,000
|
1
|
||||
$0.22
|
500,000
|
1
|
500,000
|
1
|
||||
$0.24
|
32,546,250
|
1
|
32,546,250
|
1
|
||||
$0.35
|
15,235,000
|
.1
|
15,235,000
|
.1
|
||||
Total
|
175,934,644
|
171,001,644
|
On
February 1, 2007, the Company issued in the aggregate 15,235,000 warrants
to
purchase common stock of the Company (the “Warrants”) to certain institutional
investors and individual accredited investors. The Warrants vested
immediately and had an exercise price of $0.35 per share. The
Warrants expired on November 1, 2007. On February 1, 2007, an equal
number of warrants issued to the same institutional and individual investors
and
with substantially similar terms expired. The fair value of these
warrants was approximately $33,755 and they were recorded as expense on the
issue date.
Also
on
February 1, 2007, the Company issued 500,000 warrants to consultants, which
vested immediately, and have an exercise price of
$0.14. Additionally, the Company issued 100,000 warrants to a
consultant, which vest over a period of ten months, and have an exercise
price
of $0.14. Together, these warrants were valued at $49,068 and expire
on December 31, 2009.
During
the second quarter of 2007, the Company issued 500,000 immediately vesting
warrants to consultants with an exercise price of $0.11. These
warrants expire on December 31, 2009, and were valued at
$19,815. They were charged to expense upon issuance.
6
HEALTH
DISCOVERY CORPORATION
Notes
to Financial Statements, continued
Note
D - STOCK-BASED EXPENSE, continued
During
the third quarter of 2007, the Company issued 60,750 warrants, which expire
on
December 31, 2008, to a vendor as payment for professional services
rendered. These warrants had an exercise price of $0.10 and were
fully vested upon issuance. The fair value of $1,719 was recorded as
expense. The Company also issued 300,000 warrants with an exercise
price of $0.08 to a former employee as part of a termination
agreement. These warrants, which expire after three years, vested
immediately and had a fair value of $13,869. This amount was recorded
as compensation expense. Two new directors were each awarded
1,500,000 warrants which vest over three years and expire in six
years. These warrants have an exercise price of $0.08 and had an
aggregate fair market value of $197,374. These warrants will be
charged as directors’ fees over the vesting period.
The
Company also issued warrants in connection with the sale of common stock
effective September 7, 2007. Each purchaser of common stock received
one warrant exercisable at $0.14 (the “Tranche 1 Warrants”) and one warrant
exercisable at $0.19 (the “Tranche 2 Warrants”) for each share of common stock
purchased or converted from debt. All these warrants vested
immediately, expire three years from the date of issuance, and are subject
to
call rights based upon the trading value of the Company’s stock. With
respect to the Tranche 1 Warrants, if the Company’s stock trades for an amount
in excess of $0.17 for thirty (30) consecutive days, then 50% of the warrants
may be called by the Company. With respect to the Tranche 2 Warrants,
if the Company’s stock trades for an amount in excess of $0.24 for thirty (30)
consecutive days, then 50% of the warrants may be called by the
Company. The Tranche 1 warrants, if exercised, may result in the
issuance of up to 51,538,832 shares of the Company’s common stock, at an
exercise price of $0.14 per share, and the Tranche 2 warrants, if exercised,
may
result in the issuance of up to 51,538,832 shares of Company common stock
at an
exercise price of $0.19 per share. These warrants were valued at
$0.005 each resulting in $515,388 of common stock proceeds being allocated
to
the fair value of the warrants and credited to equity.
Note
E – GAIN ON RESTRUCTURING OF ACCOUNTS PAYABLE
On
March
1, 2007, the Company recorded a gain on accounts payable restructuring of
$44,594 pursuant to the agreement made in the third quarter of 2006 deferring
some payments until certain conditions were met or eliminating the liability
if
these conditions did not occur.
Note
F - PATENTS
The
Company has acquired a group of patents related to biotechnology and certain
machine learning tools used for diagnostic and drug discovery. Legal costs
associated with patent acquisitions and the application
process for new patents are also capitalized as patent assets. The Company
has
recorded as other assets $3,108,500 in patents and patent related costs,
net of
$877,294 in accumulated amortization, at September 30, 2007.
Amortization
charged to operations for the nine months ended September 30, 2007 and 2006
was
approximately $197,040 in both years. The weighted average
amortization period for patents is 14 years. Estimated amortization
expense for the next five years is $263,120 per year.
Note
G – INVESTMENTS
On
March
27, 2007, the Company and an investment partner formed SVM Capital LLC as
an
equity investment for purposes of utilizing SVMs as a quantitative investment
management technique. The Company owns 42.5% of the membership
interests. Accordingly, the investment is presented using the equity
method of accounting.
Note
H – STOCKHOLDERS’ EQUITY
In
January 2007, the Company issued 100,000 shares of stock for warrants exercised
at $0.01 each. Proceeds of $1,000 were recorded in capital
stock. In July 2007, the Company increased the number of authorized
shares from 200,000,000 to 300,000,000.
7
HEALTH
DISCOVERY CORPORATION
Notes
to Financial Statements, continued
Note
H – STOCKHOLDERS’ EQUITY, continued
In
July
2007, the Company issued 575,000 shares of common stock valued at $46,000
to a
former employee as part of a termination agreement. The Company also
issued 400,000 shares of common stock valued at $32,000 as part of a litigation
settlement in July 2007.
Effective
September 7, 2007, the Company issued 31,937,500 shares of restricted common
stock in return for $2.55 million in cash. The stock is restricted
from resale as the stock has not been registered. Each purchaser of
common stock also received one warrant to acquire an equal number of shares
at
$0.14 and one warrant to acquire an equal number of shares at
$0.19. The common shares were valued at $0.07 each and the warrants
were valued at $0.005 each for a total of $0.08.
The
Company also issued 19,601,323 shares of common stock and 7,737,184 shares
of
Series A Preferred Stock in a conversion of secured debt to
equity. The amount of debt converted to common stock and warrants was
$1.6 million and the amount of debt converted to Series A Preferred Stock
was
$594,975. Each share of common stock issued in the conversion was
accompanied by one warrant to acquire an equal number of shares of common
stock
at $0.14 and one warrant to acquire an equal number of shares of common stock
at
$0.19.
Converted
Debt
|
Common
Stock
19,601,323
Shares
|
Common
Stock
Warrants
@0.14
19,601,323
|
Common
Stock
Warrants
@$0.19
19,601,323
|
Common
Stock
Total
|
Preferred
Stock
7,737,184
Shares
|
|||||||||||||||||||
Term
Debt
|
$ |
321,911
|
$ |
157,167
|
11,226
|
11,226
|
179,619
|
142,292
|
||||||||||||||||
Convertible
Debt
|
$ |
616,292
|
$ |
220,068
|
15,719
|
15,719
|
251,506
|
364,786
|
||||||||||||||||
Promissory
Note
Payable
|
$ |
1,000,000
|
$ |
875,000
|
62,500
|
62,500
|
1,000,000
|
-
|
||||||||||||||||
Accrued
Interest
|
$ |
224,878
|
$ |
119,859
|
8,561
|
8,561
|
136,981
|
87,896
|
||||||||||||||||
Total
Debt
|
$ |
2,163,081
|
1,372,094
|
98,006
|
98,006
|
1,568,106
|
594,974
|
|||||||||||||||||
Promissory
Note
Payable
|
||||||||||||||||||||||||
Discount
Unaccreted
|
$ | (269,307 | ) | $ | (235,644 | ) | (16,832 | ) | (16,832 | ) | (269,308 | ) |
-
|
|||||||||||
Increase
in
Equity
|
$ |
1,893,774
|
$ |
1,136,450
|
81,174
|
81,174
|
1,298,798
|
594,974
|
Series
A Preferred Stock
The
shares of Series A Preferred Stock may be converted into common stock of
the
Company at any time and from time to time, and without the payment of additional
consideration. The Series A Preferred Stock must be converted into
common stock of the Company when the trading value of the common stock of
the
Company exceeds $0.12 per share for a period of 30 consecutive calendar
days. The holder of the Series A Preferred Stock has the right to
receive dividends, the right to vote on matters presented to the common
stockholders, and a preference right in the event of liquidation in an amount
equal to $594,975, which is the amount of debt converted, plus any declared
but
unpaid dividends. The Company has a right to redeem the shares of
Series A Preferred stock upon the fifth anniversary of the issue date at
a
redemption price of $0.08 per share.
Note
I – LITIGATION SETTLEMENT
On
June
19, 2007, the Company entered into a settlement agreement (the “Settlement
Agreement”) among Bill G. Williams, Shirley K. Williams, and Automated Shrimp
Corporation (collectively, the “Defendants”), Stephen Barnhill as Third-Party
Defendant, and Baptist Community Services, Tim Holloway, Guadalupe Family
Limited Partnership, and Gerald Easterling as Intervenors in connection with
the
pending litigation styled Health Discovery Corporation v. Williams et
al., filed in the District Court of McLennan County, State of Texas, Civil
Action File No. 10-04-00012-CV. Pursuant to the terms of the
Settlement Agreement, each party agreed to voluntarily dismiss with prejudice
any and all claims it has against each and every other party. In
consideration for entering into the Settlement Agreement, the Company agreed
to
issue in the aggregate 400,000 shares of Company common stock valued at $32,000
to the Defendants and pay the defendants an aggregate $10,000.
8
HEALTH
DISCOVERY CORPORATION
Notes
to Financial Statements, continued
Note
J – GOING CONCERN
The
accompanying financial statements have been prepared in conformity with
principles of accounting applicable to a going concern, which contemplates
the
realization of assets and the liquidation of liabilities in the normal course
of
business. Limited revenue has been derived since inception, and the
Company has not yet generated sufficient working capital to support its
operations. The Company’s ability to continue as a going concern is
dependent, among other things, on its ability to control certain costs and
obtain new contracts to eventually attain a profitable level of
operations.
The
Company
is licensing the technology underlying
several of its patents and providing supporting services related to the
application of such technology that is resulting in ongoing
revenue. The Company has recently raised $2.55 million in cash
through a common stock offering and additionally converted $2.2 million of
secured debt to equity. Based on these developments, management
believes revenue generation will continue, additional licensing agreements
will
be obtained in the near-term, and non-revenue generating costs will be
controlled.
Note
K – SUBSEQUENT EVENTS AND DEVELOPMENTS
On
November 1, 2007, warrants to purchase an aggregate of 15,235,000 shares
of the
Company’s common stock with an exercise price of $0.35 expired.
On
November 6, 2007, the Company and Dr. Stephen Barnhill, the Company’s Chief
Executive Officer, entered into an amendment (the “Amendment”) to Dr. Barnhill’s
employment agreement whereby Dr. Barnhill’s salary was increased to $300,000 per
year. This increase in salary is effective as of September 7,
2007.
The
Company also awarded Dr. Barnhill a bonus in the gross amount of $50,000,
in
recognition of his extraordinary efforts on the Company’s behalf.
9
Corporate
Overview
Our
Company is a pattern recognition
company that uses advanced mathematical techniques to analyze large amounts
of
data to uncover patterns that might otherwise be undetectable. Our
Company operates primarily in the emerging field of molecular diagnostics
where
such tools are critical to scientific discovery. Our primary business
consists of licensing our intellectual property and working with prospective
customers on the development of varied products that utilize pattern recognition
tools. We also endeavor to develop our own product line of newly
discovered biomarkers and pathways that include human genes and genetic
variations, as well as gene, protein, and metabolite expression
differences. In drug discovery, biomarkers can help elicit disease
targets and pathways and validate mechanisms of drug action. They may
also be pharmacodynamic indicators of drug activity, response and toxicity
for
use in clinical development.
We
intend
to provide pharmaceutical and diagnostic companies with all aspects of all
phases of diagnostic and drug discovery, from expert assessment of the clinical
dilemma through proper selection and procurement of high quality
specimens. We will then apply our proprietary analytical evaluation
methods and state-of-the-art computational analysis to derive relevant and
accurate clinical data, producing accurate biomarker and pathway discoveries,
resulting in patent protection of our biomarker discoveries for future
development and commercialization.
Events
and
Developments
Effective
July 1, 2007, the Company entered into a patent license and settlement agreement
with Ciphergen Biosystems, Inc. (“Ciphergen”) in connection with the pending
litigation styled Health Discovery Corporation v. Ciphergen Biosystems,
Inc. Case No. 07-00285-CRB, before the United States District Court for
the
Northern District of California (the “Ciphergen Litigation”). In
consideration for entering into the Agreement, Ciphergen agreed to pay the
Company $600,000 over a two-year period. The patent license and
settlement agreement is attached to this Quarterly Report on Form 10-QSB
as
Exhibit 10.10. For additional details regarding this settlement and
the patent license and settlement agreement, see Part II Item I of this
Quarterly Report on Form 10-QSB and Exhibit 10.10.
Also
effective July
1, 2007, the Company relocated
its corporate
offices to downtown
Savannah,
Georgia. The
company committed to a
three-year lease at a rental rate of $1,678 per month.
On
July
12, 2007, the Company, formerly a Texas corporation, completed its
reincorporation in Georgia by effecting a conversion in the Company’s legal
domicile from Texas to Georgia. The Company’s business, assets,
liabilities, net worth and headquarters were unchanged as a result of the
conversion, and the directors and officers of the Company prior to the
conversion continued to serve the Company after the conversion. In
connection with the conversion, the Company’s shares were converted on a
one-for-one basis. The conversion was approved by the shareholders
holding at least two-thirds of the outstanding common shares of the Company
at
the reconvened special meeting of the shareholders held on June 13,
2007. Articles of Conversion were filed with the Secretaries of State
of Texas and Georgia on July 12, 2007 to effect the
reincorporation. In connection with the conversion and as approved by
the shareholders, the Company filed Articles of Incorporation in the State
of
Georgia, which increased the number of authorized shares of common stock,
no par
value, from two hundred million (200,000,000) shares to three hundred million
(300,000,000) shares and authorized thirty million (30,000,000) shares of
preferred stock, no par value, with the rights and preferences to be determined
by the Company’s Board of Directors prior to issuance. The Company
also amended and restated its Bylaws. The Articles of Incorporation
and Bylaws were submitted to the shareholders and were approved on June 13,
2007.
In
accordance with the Company’s revenue generation plan, and as previously
disclosed on the Current Report on Form 8-K filed on August 3, 2007, the
Company
entered into a license agreement with Clarient, Inc. on July 31,
2007. Under the terms of the license agreement, the Company grants to
Clarient the right to use four biomarkers and several patents for its research
in developing a test to differentiate clinically significant prostate cancer
from other prostate conditions using biopsied prostate tissue. In consideration
of granting the license to Clarient, Clarient shall pay to the Company thirty
percent (30%) of the net proceeds received by Clarient or one of its affiliates
with respect to
all
tests developed during the term of the license agreement. The Company
believes that this license agreement will begin to generate revenue sometime in fiscal year
2008.
10
On
September 7, 2007, pursuant to that certain Securities Purchase Agreement,
dated
as of August 15, 2007, the Company completed the sale to accredited
institutional and individual investors of restricted common stock and warrants
to acquire restricted common stock for $2,555,000 in cash and the conversion
of
approximately $1,568,100 of the Company’s outstanding indebtedness into
restricted common stock and warrants to acquire restricted common stock (the
“Private Placement”). Under the terms of the sale and conversion, the
Company issued 51,538,823 shares of restricted common stock. In
addition, each purchaser of common stock was granted a warrant to acquire
an
equal number of shares of restricted common stock at a fixed price of $0.14
per
share until September 2010, and a warrant to acquire an equal number of shares
of restricted common stock at a fixed price of $0.19 per share until September
2010. These warrants could result in the issuance of up to
103,077,646 additional shares of restricted common stock upon exercise and
the
payment of the aggregate exercise price of approximately
$17,007,812. The Company has also effected conversions from an
additional secured debt holder concerning $594,975 in outstanding principal
and
accrued interest which was converted to shares of Series A Preferred
Stock. Neither the shares sold pursuant to the private placement nor
the shares issuable upon the exercise of the warrants will be immediately
registered under either federal or state securities laws and must be held
for at
least one year from the time they are issued or until a registration statement
covering such securities is declared effective by the Securities and Exchange
Commission. The Company has agreed to file a registration statement
within 45 days of the filing of the Company’s Annual Report on Form 10-KSB for
the fiscal year ended December 31, 2007, and to attempt to have that
registration statement declared effective thereafter.
As
a
result of the Private Placement, we have restructured our balance sheet and
cash
position. After the closing of the Private Placement as of September 30,
2007, we have reduced our outstanding interest-bearing indebtedness to $49,351,
and have a cash balance of $2,082,199. The closing of the
Private Placement also resulted in satisfaction of the conditions for
increase in salaries set forth in the Amendments to the
Employment Agreements for Dr. Barnhill and Mr. Furth. As a
result, their salaries reverted to their prior levels.
In
connection with the closing of the Private Placement, we increased the size
of
our Board of Directors with two additional outside directors: Dr. Richard
E.
Caruso, Ph.D. and Jimmy M. Woodward. Dr. Caruso is the founder
and Chairman of Integra LifeSciences Corporation (NASDAQ: IART), and Mr.
Woodward is the former Senior Vice President and Chief Financial Officer
of
Flowers Foods, Inc. (NYSE: FLO). We believe that the
guidance, advice and contacts these additional directors bring will greatly
benefit the Company as we continue to execute our business plan with a
recapitalized balance sheet.
In
the third quarter, HDC was granted
three (3) new foreign patents. The Korean Patent Office issued HDC’s
patent covering a tiered arrangement of SVMs that provides for the analysis
of
multiple data sets, such as distinct data types, to produce a single
output. Counterparts of this patent are issued in nine other
countries,
including the U.S. The
Japanese Patent Office
granted a patent covering HDC’s SVM-based image analysis
technology. Finally, the European Patent Office granted a new patent
covering the use of the FGM technology for analysis of data for recognition
of
patterns.
In
the fourth quarter to date, HDC has
received Notices of Allowance or acceptance for six (6)
new U.S.
and foreign patents. The U.S.
Patent and Trademark Office has issued Notices of Allowance
in four (4) of HDC’s pending patent applications, three (3) covering
several SVM-based methods of feature and kernel selection,
and one (1) covering use of the
FGM technology for visualization of patterns within data. The
SVM-based methods, which may be used as alternatives to or in conjunction
with HDC’s patented RFE-SVM method, are based on the work of a number of the
world’s leading authorities on learning machines and pattern recognition.
In addition, IP Australia, the Australian patent office, has issued Notices
of
Acceptance of two (2) of HDC’s pending applications covering the use of RFE-SVM
for identifying determinative genes for diagnosing and monitoring disease,
including prostate disease biomarkers identified using the method, and SVM-based
image analysis.
Operational
Activities
Negotiations
with a large European
pharmaceutical company to develop a companion diagnostic test using our
discovered biomarkers as surrogates in the last phase of a clinical trial
for
its new drug to treat BPH (enlarged prostate) remain delayed due to the
prospect’s internal consolidation issues. Based on the prospect’s
representations, we believe that discussions regarding this prospective
opportunity will resume sometime in 2008.
We
have entered into a research
agreement with a leading biotech company to develop an SVM-based diagnostic
test
to help interpret flow cell cytometry data for a particular medical
condition. Our science team’s analysis of provided data demonstrates
a successful proof of concept for presentation to our partner in the fourth
quarter of 2007. If our partner accepts our conclusions, we hope to obtain
similar work on diseases such as
leukemia and lymphoma that are far more prevalent.
11
We
have advanced discussions with a
large international healthcare company. Our objective is licensing
and product development using SVMs in diagnostic radiology, including
mammography, PET scans, CT scans, MRI and other radiological
images. We own a number of SVM patents in this field that we
believe
are very important.
We
have also initiated dialogue with
several other important industry players in the healthcare field, including
a
proposed project with one of the world’s largest pharmaceutical companies, a
marketing arrangement with one of the world’s largest generic drug
manufacturers, and other prospective partnership opportunities with additional
companies and research institutions.
In
addition to traditional license and
development agreements, we are expanding our approach to monetizing our
intellectual property. In the first quarter of 2007, we formed an
equity investment, SVM Capital, LLC, with Atlantic Alpha Strategies, LLC
to
apply our SVM pattern recognition tools to quantitative investment
analysis. We believe that research efforts to date show promise in
developing computer-based investment and hedging techniques. The
specific goal is to substantially reduce investment risk while providing
superior, but not necessarily outsized, returns for comparable asset
classes. If SVM Capital can advance the predictive art sufficiently,
the ultimate business objective is to create one or more funds that would
appeal
to conservative and risk-averse investors. We believe that there are
many “quant funds” successfully using different mathematics-based techniques,
including neural networks, to assist in the investment decision-making process
by uncovering patterns that might otherwise be impossible or too time-consuming
to discern. To the best of our knowledge, none use SVM-based
models. In broad terms, if SVM Capital can replicate in this arena
the consistent superiority SVMs have shown, for example, over neural networks
in
hundreds of medical field studies, it could achieve an advantaged and
patent-protected position in quantitative-based investments in equities,
debt
instruments, currencies and commodities.
While
we have a number of negotiations
in process with potential licensing partners, there is a possibility that
we
will be unable to reach agreement with any party, that the negotiations continue
but are not finalized, or that those that may be finalized do not provide
the
economic returns that we expect.
Three
Months Ended September 30, 2007 Compared with Three Months Ended September
30,
2006
Revenue
For
the
three months ended September 30, 2007, revenue was $17,343 compared with
$20,833
for the three months ended September 30, 2006. Revenue is recognized
for licensing and development fees over the period earned.
Effective
July 1, 2007, the Company entered into a patent license and settlement agreement
with Ciphergen in connection with the Ciphergen Litigation. In
consideration for entering into the Agreement, Ciphergen agreed to pay the
Company $600,000 over a two-year period. The revenue associated with
this settlement was recorded net of attorney fees as deferred revenue in
the
amount of $470,000 and will be recognized over the sixteen year remaining
life
of the subject patents.
Cost
of Revenues and Gross Margin
Internal
development costs of $7,500 were recorded as cost of sales for the third
quarter
2007 compared with $9,480 for the third quarter of 2006. Cost of
revenues includes all direct costs, primarily wages and research fees,
associated with the acquisition and development of patents and processes
sold. All direct costs, including some professional fees associated
with licensing negotiations, are also included in cost of revenues.
12
Operating
and Other Expenses
Amortization
expense was $65,680 for both the third quarter of 2007 and
2006. Amortization expense relates primarily to the costs associated
with filing patent application and acquiring rights to the patents.
Professional
and consulting fees totaled $304,352 for the third quarter of 2007 compared
with
$178,681 for the third quarter of 2006. The increase is due to higher
litigation related legal and patent maintenance expense.
Compensation
of $218,396 for the third quarter of 2007 was higher than the $51,587 reported
for the third
quarter of 2006. The compensation in 2006 was reduced by a reversal
of accrued wages forfeited as part of a cost-reduction in the amount of
$143,200.
Other
general and administrative expenses increased to $128,729 for the third quarter
of 2007 compared to $111,859 for the third quarter of 2006. This
increase was due to slightly higher investor relations and compliance
costs.
Loss
from Operations
The
loss
from operations for the third quarter of 2007 was $707,314 compared to $396,454
for the third quarter of 2006. This increased loss was due to
increased costs as discussed previously.
Other
Income and Expense
Interest
income was $4,926 for the third quarter of 2007 compared to $3,946 in
2006. Interest income increased because the Company had more cash on
hand to invest throughout the third quarter of 2007.
The
quarter ended September 30, 2007 includes a charge for settlement of litigation
of $42,000, which consists of $10,000 in cash and $32,000 of Company
stock.
Interest
expense was $81,395 in the third quarter of 2007 compared with $79,698 in
the
third quarter of 2006. This increase was due to the higher interest
rate associated with the renegotiated promissory notes being in effect for
the
entire reporting period.
Net
Loss
The
net
loss for the third quarter of 2007 was $825,783 compared to $451,888 for
the
third quarter of 2006. The increased loss was due to the increased
loss from operations and the litigation settlement.
Net
loss
per share was $0.01 for the third quarter of 2007 and $0.00 for the third
quarter of 2006.
13
Nine
Months Ended September 30, 2007 Compared with Nine Months Ended September
30,
2006
Revenue
For
the
nine months ended September 30, 2007, revenue was $39,010 compared with $195,833
for the nine months ended September 30, 2006. Revenue is recognized
for licensing and development fees over the period earned.
Effective
July 1, 2007, the Company entered into a patent license and settlement agreement
with Ciphergen in connection with the Ciphergen Litigation. In
consideration for entering into the Agreement, Ciphergen agreed to pay the
Company $600,000 over a two-year period. The revenue associated with
this settlement was recorded net of attorney fees as deferred revenue in
the
amount of $470,000 and will be recognized over the sixteen year remaining
life
of the subject patents.
Cost
of Revenue and Gross Margin
Internal
development costs of $18,900 and $19,134 were recorded as cost of revenues
for
the nine months ended September 30, 2007 and 2006, respectively. Cost
of revenues includes all direct costs, primarily wages and research fees,
associated with the acquisition and development of patents and processes
sold. All direct costs, including some professional fees associated
with licensing negotiations, are also included in cost of revenues.
Operating
and Other Expenses
Amortization
expense was $197,040 and $197,039 for the nine months ended September 30,
2007
and 2006, respectively. Amortization expense relates primarily to the
costs associated with filing patent application and acquiring rights to the
patents.
Professional
and consulting fees totaled $796,661 for the nine months ended September
30,
2007 compared with $925,946 for the comparable period in 2006. These
fees, related to legal, accounting and scientific activities, were lower
in 2007
because of continued efforts to control costs related to regulatory filing
activity, patent protection efforts, general corporate legal and accounting
work, and fewer warrants issued to consultants and service
providers.
Compensation
of $540,106 for the first nine months of 2007 was lower than the $611,609
reported for the first nine months of 2006. The reduction in
compensation is due primarily to options granted in 2006 totaling $190,322
included as compensation.
Other
general and administrative expenses decreased to $362,464 for the nine months
ended September 30, 2007 compared to $447,274 for the nine months ended
September 30, 2006. This decrease was largely due to ongoing cost
containment efforts.
Loss
from Operations
The
loss
from operations for the nine months ended September 30, 2007 was $1,876,161
compared to $2,005,169 for the nine months ended September 30,
2006. This smaller loss was largely due to ongoing cost reduction
efforts as previously discussed, unfavorably offset by reduced
revenue.
Other
Income and Expense
Interest
income was $14,902 for the nine months ended September 30, 2007 compared
to
$11,945 in 2006. Interest income increased because the Company had
more cash on hand to invest.
14
In
2007,
a litigation settlement of $42,000 was recorded.
Interest
expense was $285,509 for the nine months ended September 30, 2007 compared
with
$120,550 in 2006. This increase was due to the higher interest rate
associated with the renegotiated promissory notes, interest due on the
promissory note secured in September 2006, and accretion related to the discount
recorded for the warrants issued along with the September 2006 promissory
note.
A
gain on
restructuring accounts payable of $44,594 was recorded in 2007 compared to
$97,864 in 2006.
Net
Loss
The
net
loss for the nine months ended September 30, 2007 was $2,144,174 compared
to
$2,015,910 for the comparable period in 2006. The reduced loss was
due to the diminished loss from operations, unfavorably offset by the litigation
settlement.
Net
loss
per share was $0.02 for the nine months ended September 30, 2007 and
2006.
Liquidity
and Capital Resources
At
September 30, 2007, the Company had $2.1 million in available
cash. Cash used by operating activities year to date was
$1,022,709. This was due primarily to the net loss of $2,144,174;
however, net non-cash charges and adjustments of $1,121,465 favorably impacted
the computation of the net cash used. Cash used by investment
activities was $5,998 due to the acquisition of assets and the investment
made
in SVM Capital LLC. Net cash provided by financing activities was
$2,436,540, net of $64,460 in fees, due to the cash received from sale of
common
stock and from the exercise
of warrants.
A
portion
of our cash will be used to satisfy the Company’s remaining outstanding debt
obligations related to the acquisition of the SVM assets and fees due to
professionals for services performed.
The
following table summarizes the due dates of our contractual obligations.
Total
|
Less
than
1
Year
|
More
than 1 Year
|
||||||||||
Accrued
Interest Payable
|
$ |
6,028
|
$ |
-
|
$ |
6,028
|
||||||
Deferred
Compensation
|
69,500
|
12,000
|
57,500
|
|||||||||
Convertible
Notes Payable
|
49,351
|
-
|
49,351
|
|||||||||
Office
Lease
|
55,327
|
20,118
|
35,209
|
|||||||||
Total
|
$ |
180,206
|
$ |
32,118
|
$ |
148,088
|
The
Company, in an effort to preserve cash, to enable the Company to continue
its
operations, and as a condition to a loan from a director, negotiated a
restructuring of certain of its accounts payable with selected vendors,
primarily its legal and professional vendors. In September 2006, two
vendors reduced their outstanding balances by $37,190, or 50%, in settlement
of
the full liability for a cash payment of $37,190. This settlement was
recorded as a gain on restructuring. Several other vendors agreed to
extend the payment terms and defer collection on outstanding amounts for
an
indefinite period of time. The Company currently expects to pay such
amounts in three to six months upon increases in revenues and or additional
equity or debt financing, although none of those events is
certain. The total amount of accounts payable deferred in September
2006 was $170,966. The Company also issued 300,000 warrants to these
vendors with an exercise price of $0.10 per share. The fair value of
these warrants on the grant date was $16,872 and was recorded as an expense
in
connection with the restructuring. The deferred payments to the
vendors have all been paid, with the exception of $44,594, which was recorded
as
a gain on payables restructuring.
15
On
March
1, 2007, the Company recorded a gain on accounts payable restructuring of
$44,594 pursuant to the agreement made in the third quarter of 2006 deferring
some payments until certain conditions were met or eliminating the liability
if
these conditions did not occur.
The
Company has relied primarily on equity funding plus debt financing for
liquidity. The Company produced sales, licensing, and developmental
revenue starting in late 2005 and must continue to do so in order to generate
sufficient cash to continue operations. The Company’s plan to have
sufficient cash to support operations is comprised of generating revenue
through
licensing its significant patent portfolio, providing services related to
those
patents, and obtaining additional equity or debt financing. The
Company has been and continues to be in meaningful discussions with a variety
of
parties, which if successful, may result in significant revenue, as further
described above. In the meantime, the Company maintains a vigilant
cash conservation program.
On
September 7, 2007, pursuant to that certain Securities Purchase Agreement
dated
as of August 15, 2007, the Company completed the sale to accredited
institutional and individual investors of restricted common stock and warrants
to acquire restricted common stock for $2,555,000 in cash and the conversion
of
approximately $1,568,100 of the Company’s outstanding indebtedness into
restricted common stock and warrants to acquire restricted common
stock. Under the terms of the sale and conversion, the Company issued
51,538,823 shares of restricted common stock. In addition, each
purchaser of common stock was granted a warrant to acquire an equal number
of
shares of restricted common stock at a fixed price of $0.14 per share until
September 2010, and a warrant to acquire an equal number of shares of restricted
common stock at a fixed price of $0.19 per share until September
2010. These warrants could result in the issuance of up to
103,077,646 additional shares of restricted common stock upon exercise and
the
payment of the aggregate exercise price of approximately
$17,007,812. Neither the shares sold pursuant to the private
placement nor the shares issuable upon the exercise of the warrants will
be
immediately registered under either federal or state securities laws and
must be
held for at least one year from the time they are issued or until a registration
statement covering such securities is declared effective by the Securities
and
Exchange Commission. The Company has agreed to file a registration
statement within 45 days of the filing of the Company’s Annual Report on Form
10-KSB for the fiscal year ended December 31, 2007, and to have that
registration statement declared effective thereafter.
The
Company has also effected conversions of $594,975 in outstanding principal
and
accrued interest, which debt was converted to shares of Series A Preferred
Stock.
Subsequent
Events
On
November
6, 2007, the Company and Dr.
Stephen Barnhill,
the Company’s Chief Executive Officer, entered into an amendment (the
“Amendment”) to Dr. Barnhill’s employment agreement whereby Dr. Barnhill’s
salary was increased to $300,000 per year. This increase in salary is
effective as of September
7, 2007, and any portion of
this increase not paid since September 7, 2007
will be paid to Dr.
Barnhill. The Company also awarded Dr. Barnhill a bonus in the gross
amount of $50,000 in recognition of his extraordinary efforts on behalf of
the
Company.
Off-Balance
Sheet Arrangements
The
Company has no off-balance sheet arrangements that provide financing, liquidity,
market or credit risk support or involve leasing, hedging or research and
development services for our business or other similar arrangements that
may
expose us to liability that is not expressly reflected in the financial
statements.
Forward-Looking
Statements
This
Report contains certain forward-looking statements within the meaning of
Section
27A of the Securities Act of 1933 and Section 12E of the Securities Exchange
Act
of 1934, including or related to our future results, certain projections
and
business trends. Assumptions relating to forward-looking statements involve
judgments with respect to, among other things, future economic, competitive
and
market conditions and future business decisions, all of which are difficult
or
impossible to predict accurately and many of which are beyond our control.
When
used in this Report, the words “estimate,” “project,” “intend,” “believe,”
“expect” and similar expressions are intended to identify forward-looking
statements. Although we believe that assumptions underlying the forward-looking
statements are reasonable, any of the assumptions could prove inaccurate,
and we
may not realize the results contemplated by the forward-looking statement.
Management decisions are subjective in many respects and susceptible to
interpretations and periodic revisions based on actual experience and business
developments, the impact
of
which may cause us to alter our business strategy or capital expenditure
plans
that may, in turn, affect our results of operations. In light of the significant
uncertainties inherent in the forward-looking information included in this
Report, you should not regard the inclusion of such information as our
representation that we will achieve any strategy, objective or other plans.
The
forward-looking statements contained in this Report speak only as of the
date of
this Report as stated on the front cover, and we have no obligation to update
publicly or revise any of these forward-looking statements. These and other
statements, which are not historical facts are based largely on management’s
current expectations and assumptions and are subject to a number of risks
and
uncertainties that could cause actual results to differ materially from those
contemplated by such forward-looking statements. These risks and uncertainties
include, among others, the failure to successfully develop a profitable
business, delays in identifying customers, and the inability to retain a
significant number of customers, as well as the risks and uncertainties
described in “Risk Factors” section to our Annual Report for the fiscal year
ended December 31, 2006, filed on March 30, 2007.
16
As
of September 30, 2007 (the
“Evaluation Date”), we carried out an evaluation, under the supervision and with
the participation of our management, including our Chief Executive Officer
and
President and our Principal Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures pursuant to
Rule
13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange
Act”). Based upon this evaluation, our Chief Executive Officer and
our Principal Financial Officer concluded that, as of the Evaluation Date,
our
disclosure controls and procedures were effective under Rule
13a-15.
Because
of the inherent limitations in
all control systems, no evaluation of controls can provide absolute assurance
that the Company’s disclosure controls and procedures will detect or uncover
every situation involving the failure of persons within the Company to disclose
material information otherwise required to be set forth in the Company’s
periodic reports.
The
Company’s management is also
responsible for establishing and maintaining adequate internal control over
financial reporting to provide reasonable assurance regarding the reliability
of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles. As of the Evaluation Date, no changes in the Company’s
internal control over financial reporting occurred that have materially
affected, or are reasonably likely to materially affect, the Company’s internal
control over financial reporting.
PART
II—OTHER INFORMATION
On
June
19, 2007, the Company entered into a settlement agreement (the “Settlement
Agreement”) among Bill G. Williams, Shirley K. Williams, and Automated Shrimp
Corporation (collectively, the “Defendants”), Stephen Barnhill as Third-Party
Defendant, and Baptist Community Services, Tim Holloway, Guadalupe Family
Limited Partnership, and Gerald Easterling as Intervenors in connection with
the
pending litigation styled Health Discovery Corporation v. Williams et
al., filed in the District Court of McLennan County, State of Texas, Civil
Action File No. 10-04-00012-CV. Pursuant to the terms of the Settlement
Agreement, as amended, each party agreed to voluntarily dismiss with prejudice
any and all claims it has against each and every other party. In consideration
for entering into the Settlement Agreement, the Company agreed to issue in
the
aggregate 400,000 shares of Company common stock to the Defendants and to
pay
the Defendants an aggregate of $10,000.
Effective
as of July 1, 2007, the Company entered into a patent license and settlement
agreement (the “License Agreement”) with Ciphergen in connection with the
Ciphergen Litigation. Pursuant to the terms of the License Agreement, each
party
agreed to voluntarily dismiss with prejudice any and all claims it has against
the other party. Additionally, the Company agreed to grant Ciphergen a narrowly
focused license to use the Company’s SVM technology for the analysis
of mass spectrometry data generated only by Ciphergen or a research
collaborator working specifically on Ciphergen's behalf using
Ciphergen’s proprietary SELDI-based mass spectrometers. Pursuant
to Article III of the License Agreement, neither Ciphergen nor their
research collaborators are permitted to use the Company’s SVM
technology on any other type of molecular diagnostic data for biomarker
discovery other than SELDI-based mass spectrometry data. Ciphergen’s
limited license of the Company’s SVM technology does not allow Ciphergen to
analyze any other molecular diagnostic data such as genomic
data, gene chip data, DNA methylation data, histologic or radiologic imaging
data, clinical data and the like, all of which are fields of use where the
SVM
technology have shown success and are the subject of additional licensing
opportunities for the Company. In fact, Ciphergen may not use the Company’s SVM
technology even on proteomic data unless the data is specifically produced
on
Ciphergen’s SELDI mass spectrometer and only when analyzed by Ciphergen or a
research collaborator working primarily on Ciphergen’s
behalf. Furthermore, Ciphergen's customers have an implied license to
utilize the Company's SVM patents that will allow them to continue
using SELDI instruments with Ciphergen's Associated Software (which is
defined in the License Agreement as Ciphergen’s ProteinChip® Software,
Biomarker Patterns™ Software, and CiphergenExpress™ Software). The
License Agreement does not, however,
give Ciphergen's customers any right to use the Company’s
SVM technology apart from their use of the Associated
Software, but rather expressly excludes the addition or substitution
of third party-based SVM technology to or for the Associated
Software. Finally, the Company agreed not to sue Bio-Rad for its
manufacture, offer for sale, sale, use and importation of SELDI-based mass
spectrometers when used with the Ciphergen Associated Software noted
earlier. Bio-Rad has no right to use the Company’s SVM
technology apart from the SELDI-based mass spectrometers and Associated Software
and the SELDI instrumentation business that Bio-Rad acquired from
Ciphergen. The License Agreement expressly excludes the addition or
substitution of third party-based SVM technology to or for the Associated
Software.
17
During
the first quarter of 2007, the
Company issued 100,000 shares of stock for warrants exercised at $0.01
each. Proceeds of $1,000 were recorded in capital
stock. No stock was issued during the second quarter of
2007.
During
the second quarter, the Company issued an aggregate of 500,000 warrants to
purchase an equal number of shares of the Company’s common stock to three
members of the Company’s Scientific Advisory Board for providing advisory
services to the Company beyond which was expected in his capacity as a
Scientific Advisory Board member. These warrants vest immediately and have
an
exercise price of $0.11 per share.
In
July
2007, the Company issued 575,000 shares of common stock to a former employee
as
part of a termination agreement. The Company also issued 400,000
shares of common stock as part of a litigation settlement in July
2007.
Effective
September 7, 2007, the Company issued 31,937,500 shares of common stock in
return for $2.55 million in cash. Each purchaser of common stock also
received one warrant to acquire an equal number of shares at $0.14 and one
warrant to acquire an equal number of shares at $0.19. The common
shares were valued at $0.07 each and the warrants were valued at $0.005 each
for
a total of $0.08.
The
Company also issued 19,601,323 shares of common stock and 7,737,184 shares
of
Series A Preferred Stock in a conversion of secured debt to
equity. The amount of debt converted to common stock was $1.6 million
and the amount of debt converted to Series A Preferred Stock was
$594,975. Each share of common stock issued in the conversion was
accompanied by one warrant to acquire an equal number of shares at $0.14
and one
warrant to acquire an equal number of shares at $0.19.
Each
of
these issuances was made in reliance upon exemptions from registration pursuant
to Section 4(2) under the Securities Act of 1933, as amended.
On
November 13, 2007, Jimmy Woodward resigned from the Board of Directors
of the
Company for personal reasons.
18
The
following exhibits are attached hereto or incorporated by reference herein
(numbered to correspond to Item 601(a) of Regulation S-B, as promulgated
by the
Securities and Exchange Commission) and are filed as part of this Form
SB-2:
3.1
|
Articles
of Incorporation. Registrant incorporates by reference Exhibit
3.1 to
Current Report on Form 8-K filed July 18,
2007.
|
3.1(a)
|
Articles
of Amendment to Articles of Incorporation. Registrant
incorporates by reference Exhibit 99.1 to Current Report on Form
8-K filed
October 10, 2007.
|
3.2
|
By-Laws.
Registrant incorporates by reference Exhibit 3.2 to Current Report
on Form
8-K filed July 18, 2007.
|
4.1
|
Copy
of Specimen Certificate for shares of common stock. Registrant
incorporates by reference Exhibit 4.1 to Registration Statement
on Form
SB-2, filed June 4, 2001.
|
4.1(b)
|
Copy
of Specimen Certificate for shares of common stock. Registrant
incorporates by reference Exhibit 4.1 (b) to Form 10-KSB, filed
March 30,
2004.
|
10.1
|
Employment
Agreement with Stephen Barnhill. Registrant incorporates by reference
Exhibit 10.3 to Form 10-KSB, filed April 19, 2005.
*
|
10.1(a)
|
First
Amendment to Employment Agreement with Stephen
Barnhill. Registrant incorporates by reference Exhibit 99.2 to
Form 8-K, filed January 3, 2006.
|
10.1(b)
|
Second
Amendment to Employment Agreement with Stephen
Barnhill. Registrant incorporates by reference Exhibit 99.3 to
Form 8-K, filed September 1, 2006.
|
10.1(c)
|
Third
Amendment to Employment Agreement with Stephen Barnhill, dated
as of
August 1, 2007. Registrant incorporates by reference Exhibit
10.1(c) to Form 10-QSB filed August 16,
2007.
|
10.1(d)
|
Fourth
Amendment to Employment Agreement with Stephen
Barnhill. Registrant incorporates by reference Exhibit 99.1 to
Current Report on Form 8-K filed September 10,
2007.
|
10.1(e)
|
Fifth
Amendment to Employment Agreement with Stephen
Barnhill. Registrant incorporates by reference Exhibit 99.1 to
Current Report on Form 8-K filed November 6,
2007.
|
10.2
|
Form
of Warrant. Registrant incorporates by reference Exhibit 10.7
to Form 10-KSB, filed April 19,
2005.
|
10.3
|
Form
of Warrant. Registrant incorporates by reference Exhibit 10.9
to Form 10-KSB, filed April 19,
2005.
|
10.4
|
Employment
Agreement with Daniel R. Furth, dated as of December 5,
2005. Registrant incorporates by reference Exhibit 10.11 to
Form SB-2/A, filed December 14,
2005.
|
10.4(a)
|
First
Amendment to Employment Agreement with Daniel R. Furth, dated as
of August
1, 2007. Registrant incorporates by reference Exhibit 10.4(a)
to Form 10-QSB filed August 16,
2007.
|
10.4(b)
|
Second
Amendment to Employment Agreement with Daniel R.
Furth. Registrant incorporates by Reference to Exhibit 99.2 to
Current Report on Form 8-K filed September 10,
2007.
|
10.5
|
Employment
Agreement with Robert S. Braswell IV, dated as of January 1,
2006. Registrant incorporates by reference Exhibit 99.1 to Form
8-K, filed February 2, 2006.
|
10.6
|
Form
of Amendment to Promissory Note. Registrant incorporates by reference
Exhibit 99.1 to Form 8-K, filed January 3,
2006.
|
10.7
|
Promissory
Note by the Company in favor of William F. Quirk,
Jr. Registrant incorporates by reference Exhibit 99.1 to Form
8-K, filed September 5, 2006.
|
19
10.8
|
Warrant
by the Company in favor of William F. Quirk, Jr. Registrant
incorporates by reference Exhibit 99.2 to Form 8-K, filed September
5,
2006.
|
10.9
|
Form
of Second Amendment to Promissory Note. Registrant incorporates
by reference Exhibit 99.4 to Form 8-K, filed September 5,
2006.
|
10.10
|
Patent
License and Settlement Agreement by and between the Company and
Ciphergen
Biosystems, Inc. dated as of July 1, 2007. Registrant
incorporates by reference Exhibit 10.10 to Form 10-QSB filed August
16,
2007.
|
10.11
|
Securities
Purchase Agreement by and between the Company and the investors
listed on
Schedule A and Schedule B dated as of August 14,
2007. Registrant incorporates by reference Exhibit 10.11 to
Form 10-QSB filed August 16, 2007.
|
31.1
|
Rule
13a-14(a)/15(d)-14(a) Certifications of Chief Executive
Officer.
|
31.2
|
Rule
13a-14(a)/15(d)-14(a) Certifications of Principal Financial
Officer.
|
32.1
|
Section
1350 Certification of Chief Executive
Officer.
|
32.2
|
Section
1350 Certification of Principal Financial
Officer.
|
20
In
accordance with the requirement of the Exchange Act, the Registrant caused
this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Health
Discovery Corporation Registrant |
|||
Date: November 14, 2007 |
/s/ Stephen D. Barnhill M.D. |
||
Printed Name: Stephen D. Barnhill M.D. | |||
Title: Chief Executive Officer |
Date: November 14, 2007 |
/s/ Daniel R. Furth |
||
Printed Name: Daniel R. Furth | |||
Title:
Executive Vice President / Principal Financial
Officer/Secretary
|
21